Are you a Homo Economicus?

Students of introductory economics are familiar with Homo Economicus, the super-rational profit-maximizing animal whose every decision is governed by a bean-counting totting up of costs and benefits. Most of us know that it’s a dismal caricature of flesh-and-blood people, but an abstraction supposedly helpful for studying the dismal science. Unfortunately, a large body of research now suggests that exposure to economics is now leading more and more students to change their behaviour to that of Homo Economicus.

Yoram Bauman and Elaine Rose of the University of Washington, in a research paper titled, “Why are Economics students more selfish than the rest?”, have studied the donations of 8,743 students at Washington University between 1999 and 2002 and find that economics majors are stingier than those who major in other disciplines. Moreover, non-majors too become less generous after taking courses in introductory economics. Simply put, there must be something nasty about the subject that makes its students more selfish. Perhaps they start believing that the invisible hand, rather than they, should do the donating? Interestingly, economics majors displayed no increase in stinginess after exposure to more economics, meaning that the damage occurs at the introductory stage. The researchers argue that undergraduate economics courses are not just bad, they are a public bad.

Illustration: Jayachandran / Mint

Should we ban them then, before the virus becomes uncontrollable? Bauman and Rose stop short of proposing that we gas all economics undergraduates. Instead they say, “A heavy-handed reading of our findings might suggest that non-majors should be prohibited from studying economics, but because economics classes offer benefits as well as costs we come to a different conclusion, namely that introductory courses should do more to cover topics such as altruism and reciprocal behaviour. Profit maximization is a fine assumption for businesses, but a narrowly defined “selfish” version of utility maximization is neither accurate nor appropriate for modelling individual behaviour.” In short, we must teach them that they mustn’t believe too strongly in the models of human behaviour we use in teaching basic economics.

The unkindest cut of all, though, is delivered by Bauman and Rose when they point out that behaving like an economics textbook may also be a private bad, because studies have shown that “selfish behaviour is associated with lower psychological well-being, lower material well-being and less overall happiness than selfless behaviour. These studies present some support for what is called the hedonistic paradox: behaving as homo economicus does not appear to be individually optimal.”

The Great Depression Analogy, by Michael D. Bordo, Rutgers University and Harold James, Princeton University.NBER paper

Illustration: Jayachandran / Mint

The current slowdown has drawn many parallels with the Great Depression, with grim warnings that the downturn could last for years. Bordo and James look at three broad areas where similarities exist. These include monetary policy, the fragility of the financial sector and global imbalances. The study notes that unlike in the current crisis, the US Federal Reserve was a minor player in the recovery during the 1930s and it was the treasury that “through its policies towards gold and the consequence of devaluing the dollar did more of the heavy lifting to promote recovery”. Note the reference to the declining dollar, which is a feature of the current recovery as well. But the section on monetary policy and the one on financial fragility, to a large extent, cover well-trodden ground.

The section on global imbalances and their similarities to the 1930s, however, is not so well-known. The authors point out that while the US was the world’s creditor in the 1930s, that role is now China’s. They write, “After the crisis a question arose as to whether the flows would resume. In the 1930s, they did not and the flows of the 1920s were reversed, with movements out of Europe and South America and into the US after 1933.” But while the US stopped lending to other countries in the 1930s, China continues to buy US treasurys. Nevertheless, the researchers say, “Today there may be plenty of reasons why the Chinese may be tempted to pull back from their engagement with the old industrial economies and with the US. In fact, the external political logic carries echoes of 1931, when American banks, investors, and the US government did not want to pour in good money after bad to Europe.” Also, just as the US felt uncomfortable with institutions such as the League of Nations, viewing them as the tools of the earlier hegemonic power Britain, China too has reservations about the current international institutions. In sum, the analogies drawn in this paper are fascinating and full of lessons that need to be learnt. Whether the powers-that-be will do so or not, of course, depends on how the politics pans out.